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Big question iv · Macro (short run)

Why do economies boom and bust, and can policy smooth the ride?

Economies don't grow smoothly. Recessions throw people out of work; booms can end in inflation or crashes. Most of the fiercest arguments between schools are about this question.

Emerged 1862

Clément Juglar's study of commercial crises in France, England and the United States argued that crises recur at regular intervals, and traced them to speculation and credit built up in the boom.

SourceHistory of Economic Thought website: Clément Juglar (opens in a new tab)

In the real world

After a decade of worrying that inflation was too low, euro-area prices rose more than 10% in a year by late 2022. Almost no forecaster saw it coming.

What the schools say

9 rival answers, oldest first.

  • 1867Heterodox

    Marxian

    Marx asked where profit comes from. His answer: from paying workers less than the value they create. That makes capitalism dynamic but unequal and crisis-prone. His predictions of revolution failed, but his questions about power and distribution never went away.

    Read the school
  • 1871Heterodox

    Austrian

    Hayek's big idea: prices carry knowledge no planner could ever gather. Markets are a discovery process, and central planning fails because it can't see what prices see. Strong on that point; weaker on evidence, because its founders were wary of testing theories with data.

    Read the school
  • 1930Mainstream

    Ordoliberal

    Germany's answer to the 1930s: a strong state that sets firm rules, protects competition and keeps prices stable, then steps back. It shaped EU competition law, the ECB and the euro's fiscal rules. Critics say those rules made the euro crisis worse.

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  • 1936Mainstream

    Keynesian

    Keynes argued that economies can get stuck with mass unemployment because there isn't enough spending. Markets don't always fix themselves, so governments should step in during slumps. The 1970s exposed its limits, but every recession since has revived it.

    Read the school
  • 1950Heterodox

    Post-Keynesian

    Keynes's radical heirs. The future is genuinely uncertain, banks create money when they lend, and stability itself breeds the next crisis (Minsky). They stressed financial fragility before 2008, but remain outside the mainstream.

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  • 1956Mainstream

    Monetarist

    Milton Friedman's message: inflation comes from too much money, and central banks rather than governments should keep it steady. Its money-supply targets failed in practice, but its core idea won: today's independent, inflation-targeting central banks are its legacy.

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  • 1972Mainstream

    New classical

    What if people are smart and look ahead? Then predictable policy may achieve little, because people see it coming. This 1970s revolution changed how all macro models are built, even though most economists rejected its conclusion that recessions are efficient.

    Read the school
  • 1980Mainstream

    New Keynesian

    Today's mainstream macroeconomics. It combines forward-looking people with sticky prices, which gives central banks a reason to manage interest rates. Every major central bank uses it. Its big miss: before 2008 its models had almost no banks in them.

    Read the school
  • 1990Heterodox

    MMT

    A government that issues its own currency can't run out of it, so the real limit on spending is inflation, not debt. Popular in politics, rejected by most academic economists. And it doesn't apply to euro countries, which don't issue their own money.

    Read the school

Put it to every school

Still argued today

Where it is studied

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